The banking result season is over and was once again headlined by the continued exemplary performance of the big five banks. The ground situation may well have bene much different from a year ago, but what did not change was the happy knack of raking in profits quarter after quarter. The big five banks combined posted a massive 58 percent year-on-year increase in after-tax profits, with minimal balance sheet growth.
The asset growth over December 2019 was a meager 2 percent, led solely by investments. It is a no-brainer that banks, big and small, opted for the safe havens investing in risk free sovereign government instruments. The pandemic of course had a huge role to play in deciding which way the asset tilted. The risks posed by the coronavirus, certainly led to a sharp decline in private sector advances, paving the way for risk averse banks to park the liquidity in government securities.
Within investments, the interest rate dynamics demanded a shift in portfolio tenors, as treasury bills and PIBs saw a lot of interchange, especially during 2QCY20, when interest rates were being reduced every few weeks. Bank’s bidding in treasury bills significantly reduced in the wake of the changing interest rate dynamics. The government’s desire to improve the debt maturity profile has been lately evident, as 3 and 5-year tenure bonds in the floater category were introduced during 2QCY20.
The investment portfolio as at September end 2020 stood at a combined Rs6 trillion, a significant 16 percent increase over December 2019. The Investment to Deposit Ratio as a result increased to a longtime high of 68 percent, up from 62 percent over December 2019. Advances, on the other hand, took a dip of 10 percent over December 2019 to Rs3.4 trillion, as the ADR slid from 46 percent in December 2019 to a low of 38 percent.
The topline grew alright as the average earning assets were efficiently managed throughout the period. The focus remained on building on the already top-notch deposit base across the group, as a steady 7 percent growth in deposits was mostly a result of increase in CASA deposits. The State Bank of Pakistan had also noted in one of its performance review for the banks, that over 90 percent of all incremental deposit has been built around current and saving accounts – which becomes a key factor especially in times of thin spreads.
The second wave is here, and while one may not see the kind of disruption in economic activity seen earlier this year, some sorts of curbs cannot be rued out. The working capital demand may continue to be lackluster and banks may continue making aggressive provisions against potential NPLs. That said, the top five banks are as safe and sound as it comes, when it comes to prudence and financial soundness. A little hiccup here or there in terms of core profitability may be in order, but nothing suggests the big banks will be overly troubled.